Apple's Blowout Quarter Raises Questions

| About: Apple Inc. (AAPL)

I expect that the reason AAPL barely budged after a crushing earnings report (see conference call transcript here) in after hours trading was the fact that many used the news as a selling opportunity (the old adage, buy the rumor sell the news, comes into play). It could be that most of the good news had already been factored into the share price and then some. I also think that the many investors/speculators late to the game figured this would be a way to get out without losing their shirts (especially those who were spooked by the Steve Jobs announcement). There is no doubt it was a great quarter, but there were a few details in the report that are worth bringing up, that just might give a few bears a glimmer of hope.

Expectations were beat, but not by enough: Sure, AAPL’s earnings of $6.43 beat analyst expectations of $5.41, by almost 19%, but if you compare that to last year’s first quarter 76% annihilation, it sounds a bit feeble. The point is, the law of larger numbers is coming into play, and AAPL’s earnings growth will certainly diminish as a consequence.

Gross profit margin contraction: You would think that if your sales increased 70%, your gross profit margin would certainly follow in the same direction - strangely enough, the exact opposite occurred as AAPL’s gross profit margin actually dropped 230 basis points from 40.8% to 38.5%. As far as controlling their SG&A costs, AAPL saw its SG&A rate fall 120 basis points from 8.2% to 7% (due to higher sales leverage), despite an almost 50% increase in the category from $1.3 billion to $1.9 billion.

Income tax help: If it wasn’t for a big drop in its income tax rate, AAPL‘s results would have certainly looked less impressive. Thanks to a 440 basis point reduction in its income tax rate, from 29% to 24.6%, the almighty iPod seller was able to garner an additional 38 cents to its bottom line-without the help from Uncle Sam. AAPL would have beat expectations by only 11.8%, instead of 19%.

Second quarter guidance weak: Management indicated that the company was expected to earn $4.90 on sales of $22 billion for its fiscal 2011 second quarter. It is quite obvious that management is up to its same old tricks by severely under promising. If you add another 20% beat for the second quarter, ratcheting earnings expectations to a more reasonable estimate of $5.88, this loftier estimate still represents a 10% decrease in earnings on a sequential basis.

Bottom line: Don’t be afraid to ring the cash register on this one, as nobody ever went broke taking a profit. The shares are way overbought and due for a correction via profit taking. The bullish sentiment is so high on this one, it is scary. When everybody says buy, it might be time to sell. A 10-15% pull back would be healthy and represent a great buying opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.